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For decades the Turkish-Israeli
alliance has been one of the defining relationships of the Middle
East.

This month it broke down,
shifting the ground of regional politics and economy.

Inflamed by a UN report on the
Gaza Flotilla confrontation, Prime Minister Recep Tayyep Erdogan
suspended military ties with Israel, kicked out the Israeli
ambassador, and pushed the UN vote for a Palestinian state in a
speech to the Arab League.

His rhetoric – comparing Israel
to a ‘spoiled child’ – resonated in the Arab street and with his
own Islamist voter base in Turkey.

Analyst Taufiq Rahim says it is a
strategic gamble: Erdogan is betting that he can cut loose an
ally in Israel, cultivate friends in the Arab world, and maintain
the benefits of his ties to the West.

As a net effect, Turkey projects
greater influence in the region.

‘Erdogan is on his empire
complex,’ Rahim told Bloomberg Television.’ He’s creating an
existential rift with Israel and using that currency to curry
favor with a large part of the Middle East.’ That favor helps
open new markets, diversifying Turkey’s map of trade and
investment.

As an economic slowdown engulfs
the West, Turkey is turning to the Arab world for more of its
economic growth. Erdogan’s visit to Egypt, Tunisia, and Libya
last week – the ‘Arab Spring’ tour – was a masterstroke in the
politics of business.

Nearly three hundred Turkish
businessmen joined his delegation, signing deals on the spot
worth hundreds of millions of dollars. At stake in Libya alone:
$15 billion dollars in unfinished contracts, some from projects
between Turkish companies and the Qaddafi regime.

Today, Erdogan is moving to woo
the new Libya, cheering the revolution and praying with the
crowds in martyr’s square. That helps Turkish companies move to
the fore, smoothing over old deals and angling for the projected
$200 billion in infrastructure spending to rebuild Libya over a
decade.

Politics, religion, and business
have been intertwined in Erdogan’s Turkey, and they all point
toward greater Arab-Turkish integration. Erdogan’s Islamist
sensibilities favor a closer connection with the Muslim world,
his supporters are warm to the anti-Israel, pro-Palestinian
stance, and both have helped Turkish companies find fertile
markets in places like Iraq, Egypt, Syria, and Saudi
Arabia.

That’s a sharp shift from just a
decade ago, slicing through the Arab-Turkish tension left over
from the Ottoman empire. Across the Middle East and North Africa
trade reached $30 billion last year, surging sixfold since
Erdogan’s party took power in 2002. In contrast, trade between
Turkey and Israel was $2.7 billion in the first seven months of
this year, according to government figures.

But the strategic calculus is
harder to crunch. ‘Turkey has quite a bit to lose here,’ said
Jonathan Schanzer, analyst in Washington. ‘NATO is looking
sideways at it right now, wondering whether it’s a reliable
partner. And you have the U.S. questioning its alliance.’

Schanzer says Turkey’s shift is a
lose-lose-lose – bad for Israel’s security, bad for Turkey’s long
term strategy, and disastrous for U.S. interests in the Middle
East.

Some Israeli companies have
already lost from the diplomatic row. Elbit Systems, suppliers of
military equipment to Turkey, saw its stock price fall 5% after
Erdogan suspended military ties (though that tracked overall
losses on the Tel Aviv Stock Exchange).

Menashe Carmon, head of the
Turkish-Israeli Business Council, says he’s worried about a
long-term decline in trade, rather than a direct, immediate
hit.

‘Private business ties are
continuing without any change for the time being,’ Carmon told
Bloomberg Television. ‘[But] in the past year, people who were
thinking to invest or make long term joint ventures are on edge,
postponing decisions.’

I asked him if business leaders
in Turkey and Israel are lobbying their governments to reconcile.
Carmon said normally they would, and in the past they have. But
this time they don’t think either side would listen.